2012-13
CONTENTS
1. Introduction2
2. Audit opinion history4
3.Key focus areas8
4.Drivers of internal control17
5.Other matters of interest18
6.Other reports 18
7.Commitments 18
8.Feedback on previous resolutions 19
2012-13
- Introduction
1.1Reputation promise of the Auditor-General of South Africa
The Auditor-General of South Africa has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.
1.2Purpose of document
To brief the Portfolio Committee on Defence and Military Veterans on the audit outcomes for the 2012/13 financial year.
1.3Overview
The portfolio consists of:
- The Department of Defence and Military Veterans (the Department).
- Public entities.
- Armscor Group which consists of the following entities:
- Armaments Corporation of South Africa Ltd (Schedule 2)
- Armscor Defence Institutes (Pty) Ltd (Schedule 2)
- National Committee of Armaments Control (Other)
- Erasmusrand Eiendomme (Pty) Ltd (Schedule 2 – Dormant)
- Institute for Maritime Technology (Pty) Ltd (Schedule 2 – Dormant)
- Oospark (Pty) Ltd (Schedule 2 – Dormant)
- Sportsrand (Pty) Ltd (Schedule 2 – Dormant)
- Castle Control Board (Schedule 3A)
- Special Defence Account (Other)
- One fund under the Department.
- The South African National Defence Force Fund
1.4Organisational structure
Minister
Honourable Ms N Maphisa-Nqakula, MP
Deputy Minister
Honourable Mr. T Makwetla, MP
Secretary of Defence
Dr S Gulube
Chief of the South African National Defence Force (CSANDF)
Gen SZ Shoke
Accounting officer of Armscor
Mr JS Mkwanazi (Acting)
Accounting officer of SANDF Fund
Lt Gen TM Nkabinde
Chairperson of Castle Control Board
Lt Gen JT Nkonyane
1.5Funding
The Department (Vote 22) received a final annual appropriation of R38 billion and has spent 99.5% of the allocation in the 2012/13 financial year.
Program / 2012-13Budgeted
R’000 / 2012-13
Actual
R’000 / %
(Over)/Under
Spending / 2011-12
Budgeted
R’000 / 2011-12
Actual
R’000 / %
(Over)/Under
Spending
Department of Defence
Program 1: Administration / 3787 182 / 3781 561 / 0.15% / 3764 768 / 3747 118 / 0%
Program 2: Force employment / 2803 312 / 2780 978 / 0.8% / 2358 515 / 2358 515 / 0%
Program 3: Landward defence / 12367 922 / 12367 922 / 0% / 10962 193 / 10962 193 / 0%
Program 4: Air defence / 7074 944 / 7074 944 / 0% / 6527 742 / 6527 742 / 0%
Program 5: Maritime defence / 2894 944 / 2894 944 / 0% / 2574 714 / 2574 714 / 0%
Program 6: Military health support / 3459 916 / 3459 916 / 0% / 3400 096 / 3400 096 / 0%
Program 7: Defence intelligence / 705 051 / 705 051 / 0% / 653 113 / 653 113 / 0%
Program 8: General support / 4795 271 / 4636 902 / 3.3% / 4107 946 / 4107 946 / 0%
TOTAL / 37888 542 / 37702 218 / 0.49% / 34349 087 / 34331 437 / 0%
- Audit opinion history
DESCRIPTION / 08-09 / 09-10 / 10-11 / 11-12 / 12-13
Department of Defence
Audit opinions
Areas of qualification
- Tangible and intangible capital assets
- Accruals
- Lease commitments
- Irregular expenditure
- Departmental revenue
Other findings
- Predetermined objectives
- Material misstatement orlimitations in submitted AFS
- Annual financial statements and annual report
- Expenditure management
- Audit committees
- Financial misconduct
- Internal audit
- Strategic planning and performance management
- Transfer and conditional grants
- Procurement and contract management
- HR management
Armscor Group
Audit opinions
Other findings
- Strategic planning and performance management
SANDF Fund
Audit opinions
Other findings
- Predetermined objectives
- Audit committee
- Strategic planning and performance management
Special Defence Account
Audit opinions
Other findings
- Financial misconduct
- Material misstatement orlimitations in submitted AFS
- Annual financial statements and annual report
- Strategic planning and performance management
- Procurement management
Castle Control Board
Audit opinions
Other findings
- Predetermined objectives
- Material misstatement orlimitations in submitted AFS
- Unauthorised, irregular, as well as fruitless and wasteful expenditure
- Annual financial statements and annual report
- Budgets
- Audit committees
- Internal audit
- Strategic planning and performance management
- Procurement management
AUDIT OPINION
CLEAN AUDIT OPINION: No findings on PDO and Compliance
UNQUALIFIED with findings on PDO and Compliance
QUALIFIED AUDIT OPINION (with/without findings)
DISCLAIMER/ADVERSE AUDIT OPINION
The audit report of the Department of Defence was signed on 26 September 2013. The department received a qualified audit opinion relating to tangible and intangible assets, which was a regression from the prior year when they received an unqualified with findings opinion. The National Treasury granted the department a departure to only disclose certain categories of assets for the financial year ended 31 March 2012.
The entities in the portfolio have improved since Armaments Corporation of South Africa Limited and Special Defence Account improved from unqualified with findings to unqualified with no findings.
2.1Significant emphasis of matters
Entity / Significant emphasis of mattersDepartment / Financial reporting framework
As disclosed in note 33 to the financial statements, the National Treasury has granted the department departures from the Departmental Financial Reporting Framework. In terms of these departures, the department is not required to disclose opening balances for computer equipment, furniture and office equipment, other machinery and equipment, biological assets, intangible capital assets and minor assets. The departures granted further provide that only certain categories of heritage assets can be included in the asset register andminor assets be valued at R1. Thesedepartures are set out in the accounting policy note.
Armscor / Events after reporting date
With reference to note 33 to the financial statements, Armscor Defence Institutes SOC Ltd is in the process of being dissolved as a separate entity and will be incorporated into the newly formed Research & Development Department of the holding company, Armscor SOC Ltd. Based on this decision the total business of the company will be transferred to the holding company as a going concern with effect from 1 April 2013.
Special Defence Account / Financial reporting framework
As disclosed in note 1.6.1 to the financial statements, the Minister of Finance has exempted the SDA per General Notice 563 of 2012 issued in Government Notice No 35533 of 23 July 2012 from applying GRAP 6 and instead applies GRAP 104 regarding special defence activities.
Significant uncertainties
As disclosed in note 17 to the financial statements, the SDA through the DOD and its service provider is a defendant in certain lawsuits. The outcome of these lawsuits cannot be determined at present and no provision has been made for any liability that may result. The aforementioned is in accordance with the requirements of the accounting standards.
Restatement of corresponding figures
Misstatements in the corresponding figures were identified during our audit of the financial statements of the current year relating to Receivables: Prepayments contract and Other Financial Assets.
2.2Significant additional matters
Entity / Significant additional mattersDepartment / Unaudited supplementary schedules
The supplementary information does not form part of the financial statements and is presented as additional information. I have not audited these annexures and, accordingly, I do not express an opinion thereon.
Financial reporting framework
The financial reporting framework prescribed by the National Treasury and applied by the department is a compliance framework. The wording of my opinion on a compliance framework should reflect that the financial statements have been prepared in accordance with this framework and not that they “present fairly”. Section 20(2)(a) of the PAA, however, requires me to express an opinion on the fair presentation of the financial statements. The wording of my opinion therefore reflects this requirement.
Armscor / Other reports required by the Companies Act
As part of my audit of the financial statements for the year ended 31 March 2013, I have read the Directors’ responsibilities and Approval and the report of the Director for the purpose of identifying whether there are material inconsistencies between these reports and the audited financial statements. These reports are the responsibility of the respective preparers. Based on reading these reports I have not identified material inconsistencies between the reports and the audited financial statements. I have not audited the reports and accordingly do not express an opinion on them.
2.3Qualification paragraph
The department was the only entity in the portfolio with a qualification. The qualification paragraph reported is:
Movable tangible capital assets
The department did not disclose all movable tangible capital assets in accordance with the Departmental Financial Reporting Framework prescribed by National Treasury. Consequently movable tangible capital assets as disclosed in disclosure note 33 to the annual financial statements are understated by approximately R818 million.
Intangible capital assets
I was unable to obtain sufficient appropriate audit evidence that all intangible assets, as disclosed in note 34 to the annual financial statements, were disclosed in accordance with the Departmental Financial Reporting Framework prescribed by National Treasury. I was also not able to perform alternative audit procedures due to non compliance with the framework and the lack of internal controls. Consequently I could not determine the extent of the misstatement.
- Key focus areas
- Predetermined objectives
Entity / Finding / Root cause / Recommendation
Department / The National Treasury Framework for managing programme performance information (FMPPI) requires that institutions should have appropriate systems to collect, collate, verify and store performance information to ensure valid, accurate and complete reporting of actual achievements against planned objectives, indicators and targets.
I was unable to obtain the information and explanations I considered necessary to satisfy myself as to the reliability of information presented for significantly important targets with respect to the Force Employment Programme. / This was due the fact that the institution could not provide sufficient appropriate evidence in support of the information presented with respect to the programme as a result of inadequate internal control and record keeping. / Control measures should be implemented to ensure that supporting documentation is readily available in a timely manner.
Castle Control Board / Measurability of targets and indicators / Management did not receive the necessary training relating to the National Treasury Framework for managing programme performance information. / Necessary training to be rolled out.
3.2Supply chain management
Entity / Finding / Root cause / RecommendationDepartment / Goods and services with a transaction value below R500 000 were procured without obtaining the required price quotations, as required by Treasury Regulation 16A6.1.
Contracts and quotations were awarded to suppliers whose tax clearance certificates from the South African Revenue Services had not been submitted as required by Treasury Regulation 16A9.1(d) and the Preferential Procurement Regulations.
The preference point system was not applied in all procurement of goods and services above R30 000 as required by section 2(a) of the Preferential Procurement Policy Framework Act and Treasury Regulations 16A6.3(b).
Contracts and quotations were awarded to bidders who did not submit a declaration on whether they are employed by the state or related to any person employed by the state/department and who may be involved with the evaluation and/or adjudication of bids. / Supply chain management policies and procedures are not always adhered to throughout the Department.
Inadequate controls over the monitoring of payments per contract.
Inadequate reviewing and monitoring of compliance with applicable laws and regulations. / Management should establish and communicate policies and procedures to enable and support understanding and execution of internal control objectives, processes and responsibilities.
Prospective suppliers must be required to submit a declaration of interest when they apply for registration on the list.
These conditions must be clearly stated in the SCM policy.
Controls which review and monitor compliance with applicable Practice Notes should be implemented.
At least three quotations should be obtained from prospective suppliers and in cases where three quotations could not be obtained; the reasons should be recorded and approved by the accounting officer / authority or his / her delegate.
Preference points awarded for price and B-BBEE status level of contribution should be calculated for all awards between R30 000 and R1 million.
Castle Control Board / Goods and services with a transaction value below R500 000 were procured without obtaining the required price quotations, as required by Treasury Regulation 16A6.1.
Contracts and quotations were awarded to suppliers whose tax matters had not been declared by the South African Revenue Services to be in order as required by Treasury Regulations 16A9.1(d) and the Preferential Procurement Regulations.
The preference point system was not applied in all procurement of goods and services above R30 000 as required by section 2(a) of the Preferential Procurement Policy Framework Act and Treasury Regulations 16A6.3(b).
Contracts were awarded to bidders based on preference points that were not calculated in accordance with the requirements of the Preferential Procurement Policy Framework Act and its regulations. / SCM policies and procedures were not established and communicated.
There is a lack of monitoring and review by management to ensure correct application of the requirements of the PFMA in terms of Supply Chain Management. / Policies and procedures to be established and communicated
3.3Human resources
Entity / Finding / Root cause / RecommendationDepartment / Some employees were appointed without following a proper process to verify the claims made in their applications, in contravention of PSR 1/VII/D.8. / Management does not perform oversight of performance reporting and compliance.
Management does not review and monitor compliance with applicable laws and regulations.
Inadequate controls have been implemented to ensure compliance with laws and regulations / Management should implement controls to ensure that laws and regulations are complied with.
3.4Information technology controls
Entity / Finding / Root cause / RecommendationDepartment / IT governance
User access management
Program change management
IT service continuity / The draft DOD governance of information and communication systems framework was developed in June 2012 as a proactive measure for the purposes of alignment with the Government information and communication technology policy framework. In this regard, the DPSA implementation guidelines require the department to have an approved document by March 2014. The DOD must also develop a policy and charter to be approved at corporate level as per DPSA guidelines. Furthermore, the position of a permanent government information technology officer (GITO) has also been vacant since 1 September 2010.
The management would like the CMIS Div guidelines for DOD ICT acquisition document to be approved at the minister level as there is a lot of money involved in the project management process. Therefore, the document is in process of approval, which might delay because of the approval process that needs to be followed.
Non-compliance with the DODI, chapter 5, (information and communication systems access control). This is due to the lack of consequences for non-compliance.
The acting director: financial management information support services did not develop action plans and assign the responsibility to implement the recommendations of the prior year. This resulted in repeat findings with regard to the lack of formally designed controls to monitor the actions of the system managers.
The director: logistics management with support from the system owners for the distributed environment (CALMIS and OSIS) did not develop action plans and assign the responsibility to implement the recommendations of the prior year. This resulted in repeat findings of lack of implementation of controls around IT service continuity. / While awaiting the DPSA to finalise and approve the ICT governance framework, the acting GITO should ensure that the department continues to implement good ICT governance practices.
The director for joint information systems management and her supporting staff should ensure that the CMIS Div guidelines for DOD ICT acquisition document is approved by required level of management and is implemented accordingly to ensure that the ICT projects are properly managed. They should also ensure that compliance to the document is monitored.
The chief financial officer (CFO), with support from the system owner and system managers, should ensure that –
- ICT is prioritised by ensuring that action plans to address audit findings are developed and tracked
- there are consequences for non-compliance to set procedures
- the responsible officials are effectively monitored, for them to perform their duties accordingly
- the current user access management procedures are updated to include the following:
- monitoring actions of the system managers performed on the system (creation of IDs, user ID maintenance, allocating functions to users, etc.).
The director: asset management and system owners should ensure that:
- the current program change management procedure document (Logistics TSS problem and change management) is revised and updated to include the following:
- procedures for emergency changes/fixes
- monitoring the actions of the developers/programmers on the system
- roll back plan
- the program change management procedure document is approved by the required level of management and implemented accordingly. The compliance with the procedure document should also be reviewed and monitored regularly.
- management implements consequences for non-compliance with set standards.
3.5Financial health status
N/A
3.6Material Mistatements to Financial Statements
Entity / Finding / Root cause / RecommendationDepartment / Material misstatements identified by the auditors in the submitted financial statements were subsequently corrected and the supporting records were provided subsequently, but the uncorrected material misstatements resulted in the financial statements receiving a modified audit opinion. / Complete asset registers are not in place and there is insufficient review and monitoring of controls in place to ensure that the asset register is accurate.
Lack of performance of reconciliations of amounts disclosed in specialised military contracts and the asset register.
Management does not implement controls over reconciling of transactions to supporting documentation.
The department did not implement proper record keeping and monitoring controls to ensure that complete, relevant and accurate base cost information supporting fair value amounts in the asset register. / Asset verification as close as possible to 31 March should be performed and difference should be followed up in a timely manner to ensure a complete and accurate asset register at year end.
Controls should be implemented to ensure that all the required information on the asset register is complete and accurate.
Procedures should be implemented and monitored to ensure that amounts disclosed in contracts are reconciled to the asset register
Records evidencing the cost of assets as recorded in the fixed asset register should be kept in a manner that would allow the retrieval of such documentation in a timely manner.
Management should implement controls over reconciling of transactions to supporting documentation.
Information should be properly checked before it is captured on the asset register.